Monday, October 6, 2008

Chapter 5

Chapter 5 – The US Economy: Private and Public Senators

The US has 109 households – a housing unit, they are the ultimate suppliers of all economic resources and the major spenders in the Econmy

The Functional Distribution of Income – how income is apportioned through wages, interest, and profits.  Largest source of income of households are wages and salaries paid to workers (not capital!)

Personal Distribution of Income – How the nation’s money income is divided among individual households (ex in 2001 the poorest 20% of households received only 3.5% of the income while the richest 20%)

Households as Spenders – how households spend their money

Personal Taxes – about 13% of income (in 1941 it was only 3%)

Personal Savings – Aftertax income that is not spent, accounts for about 3%... proportionate with income (higher earning people save more of their money).  Dissave is to draw more from savings then you put in

Personal Consumption Expenditures – shit that you buy … more than 80%.  12% of which are durable goods – goods that keep on giving ie Automobiles, computers, furniture.  29% are nondurable goods (stuff that is used up within 3 years) – food, clothing, gasoline. 59% is for services (medical, lawyer fees etc)  Because the last percentage is so high, the US is called a Service-oriented economy

Buying the first share of a stock is an investment but otherwise its just a transfer in money, buying a car for personal use is not an investment but buying one for business is

Primary Economy – Producing Raw materials

Secondary Economy – Industrialization, using the goods

Tertiary Economy – service oriented economy

The Business Population

Plant – The physical place where shit is built, sold or services are provided

Firm – a business entity which owns plants

Industry – a grouping of firms that produce similar products (ie the auto industry includes Ford, Chevrolet, Honda etc)

Horizontal Integration – A firm produces similar goods (ie the CocaCola produces Coke, Vault etc)

Vertical Integration – when a company trys to control a market by controlling different types of the same general market – (ie Gap has Banana Republic for the high end market, Gap for the mid market, and Old Navy for cheap stuff)

Conglomerate – when a company produces stuff for a bunch of different markets (ie General Electric)

Legal Forms of Businesses

Sole Proprietorship – a business owned and operated by one person,

less paperwork, people work harder because they directly benefit, more freedom of action.  However its difficult to grow because because finances are limited for R&D, also there’s a lack in specialization.  Most importantly there’s unlimited liability, if the business fails the owners go bankrupt too

Partnership – two or more individuals own and operate –

Same pros and cons of Sole Proprietorships except to a lesser extent, does give more capitol,

Also limited versions – REIT – Real estate investment trust – someone else manages

Corporation – a legal creation that can acquire resources, own assets etc etc.  it is distinct from and separate from the individual stockholders who own it, hired managers usually run the show

Can raise vast amounts of capitol compared to sole proprietorships and partnerships,  can sell Stocks (shares of ownership) and Bonds (Promises to pay someone an amount later).  Stocks and Bonds are called securities

By selling securities, the business is less liable because the stock owners would take a lot of the fall

Limited Liability – Stock owners only stand to lose however much they paid for their stock, they cannot be personally sued

Legally immortal – sale of stock does not disrupt the continuity of the company

Can have more red tape but overall it is more effective/efficient

Double Taxation – Dividends (money stockholders receive from profits) are taxed as corporate profits and as income for the stockholders


LLC – limited liability company – Typically where a partnership enjoys protection from the usual liability, limited life span of 30-40 years

S Corporation – 75 or fewer stockholders, avoids double taxation and enjoys limited liability

Principal-Agent Problem

Principals (stockholders) and Agents (managers of the corporation) may have a conflict of interest.  Stockholders want to maximize profits while managers want to earn larger salaries expand the company

Try to align interests by offering stock as part of the salary, this in turn may lead to an attempt to inflate stock prices leading to Enron type situations

While the majority of businesses are sole proprietorships, Corporations produce the majority of goods/services

The Public Sector – governments role

Provides the Legal structure – sets the legal status of business enterprises, ensures property rights and helps allocate resources, establishes a medium of exchange (money)

Maintains Competition – protection from monopolies (some monopolies are only regulated for example local power suppliers)

Redistributing Income – Distribute more than what the market would naturally give to the least skilled of the workforce by

Transfer Payments – ie Welfare, they give money to the destitute and dependent

Market Intervention – Give farmers above natural market prices/minimum wages

Taxation – Sliding tax scale taxes the rich more than the poor (supposedly)

Reallocating Resources – Market failure occurs when the market creates too much of one thing or not enough of some necessary goods/services

Spillovers or Externalities – in a competitive market sometimes costs or benefits might not just be particular to a buyer/seller interaction.  Ie by producing product A you fuck up the water supply thus fucking up the fishing industry down river and then the hippies get mad

Spillover Costs – Production/consumption costs that a third party bears,  Ie pollution

Correction for Spillover Costs

                Legislation – EPA type stuff, makes companies at least somewhat liable

Specific taxes – ie taxing each unit of pollution

Spillover Benefits – Education and vaccination benefit not only the direct receivers

In order to increase spillover benefits the gov’t can subsidize the sale of items that have spillover benefits, ie tax benefits for Hybrids

Subsidize suppliers – Ie subsidizing state universities/offering scholarships

Provide goods via gov’t – ie free or subsidized flu vaccines

Public Goods and Services

Private goods have two characteristics: Rivalry and excludability.  Rivalry – When one person buys and consumes a product it is unavailable for someone else. Excludability – buyers who are willing/able to pay the price get the benefit

Public goods are something that everyone can enjoy without creating competition (ie air hopefully, and your mom)

Free rider problem – people can receive benefits without paying a price

Quasi Public goods

Education, streets, highways—things gov’t provides because if left to the market they would be underproduced b/c of the spillover benefits

The Reallocation Process – How are resources taken from the private sector to the public sector? Tries to reduce private demand for the item by levying taxes, by diverting purchasing power from private spenders to gov’t taxes remove resources from private use

Promoting stability

Unemployment – May try to augment private sector spending so that the total spending is enough to achieve

Inflation – General increase in the price of goods – increase when spenders try to buy more than the countries capacity to produce, gov’t would try to cut its spending to reduce overall spending, may also try to increase interest rates so as to increase interest rates and private borrowing and spending

Adding Gov’t to the circular flow model

Put gov’t in the center

Households – exchange goods and services for taxes

Product Market – exchanges expenditures for goods and services

Resource market – Exchange expenditures for resources

Businesses – exchange goods and services for net taxes

Gov’t Purchases and transfers          

Gov’t purchases – are exhaustive – directly absorb resources and are part of domestic output

Transfer Payments – nonexhaustive – do not directly absorb resources, ie social security – the benefactors do not make a contribution to the economy in return for them

Federal Finance

Federal expenditures – 4 very important ones – Pensions and income security, national defense, health, interest on the public debt

Federal tax revenues - Personal Income tax – levied on taxable income after business expenses, charitable contributions etc are deducted.  It is a progressive tax meaning it has higher tax brackets for people with larger incomes

Marginal tax rates – the amount of additional taxes levied when you go up a tax bracket, ie the marinal rate of 1-14k is 10 percent, 15% on 14k to 57k etc

Average tax rate – the total taxes payed divided by athe amount of taxable income

Payroll Taxes – taxes based on wages and salaries, used to finance meicare and Social Security

Corporate Income tax – levied on a corporations profit – usually 35%

Excise taxes – Taxes on commodities or on purchases.  Sales taxes are on everything, excises are only on special goods like gas, tobacco etc

State and local finances

47% generated from sales tax, also local income taxes

Education spending accounts for 36 percent

Local Finances – obtain 72% from property taxes

Local spending is about half and half local/federal taxes


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